New Grads – Avoid Introductory 0% APR Credit Cards

Graduating college and starting a new life on your own is a scary time. If you’re like most students, you already have debt, and you certainly don’t have piles of cash sitting around for you to splurge on a nice apartment, high-end furniture, and fancy work clothes yet. If you’re lucky enough to have a job lined up, your future is a bit more secure, but that’s no reason to become complacent about your finances.

Let me tell you a story about a girl I knew in college. She had a great job lined up with a nice salary, so when she left school, she got a credit card with a 12 month introductory 0% APR. She figured she could put all of her “necessities” – a security deposit on a nice apartment, an apartment full of furniture, and work clothes – on her credit card, and pay them off interest-free over the course of the year with her new salary.

If her plan raises your blood pressure, that would be the normal response. She charged several thousand dollars to her credit card (close to $10k I believe) with only the hope that she would be able to pay it off before the introductory rate expired.

Why is this such a bad idea? Because you’re counting your chickens before they hatch, as they say. Any number of things could happen during those 12 months that would render her unable to pay off her debt.

She Could Lose Her Job

Most entry-level jobs have a trial period written into their contracts, at the end of which the employer decides whether you’re a good fit for the company. While it may not be common that new employees are let go at the end of the trial period, I do know of one person at my company who was let go after three months, so it is a real possibility.

If there’s one time in your life when your job security is most uncertain, it’s when you’re a newly minted adult with no experience whatsoever who hasn’t even started her first job yet. If you lose your job three months after taking on a mountain of debt, you’ll be very sorry indeed.

She Could Have an Emergency

In my first four years of employment, I had three expensive medical procedures: wisdom teeth removal, tonsillectomy, and appendectomy. I was well prepared for each of these procedures because I had built up a sizable emergency fund and had no debts.

If I had taken my classmate’s approach, I would already be stretched thin making payments on my credit card debt, and I would have had to choose between paying off the debt or paying for my medical procedures. Not a position you want to be in.

She Has No Idea How Much Money She’ll Need

Oftentimes, people in their 40′s and 50′s have no idea how much money they spend on what, so we can hardly expect a 22 year old kid who has never lived on her own to have any idea whatsoever how much money she’ll need to meet her monthly expenses. Taking on a mountain of debt in the hopes that your new salary will cover it in addition to rent, food, transportation, entertainment, and savings is highly risky. If you realize later that your salary isn’t enough to cover all of it, the most likely area you’ll let slip is savings.

So What’s the Better Option?

It would be a great conclusion if my classmate realized the folly of her ways, struggled to get out of debt, and vowed to never make such a foolish decision again, but unfortunately I lost contact with this classmate soon after graduation, so I have no idea how her plan worked out for her.

But how can recent grads get their footing on their own without taking on debt? As I’ve already pointed out, most recent grads don’t have any extra money lying around to cover security deposits, furniture, and work clothes. Well, you might have to get creative. Most apartment complexes will require a security deposit, and many also require first and last month’s rent up front. If you have a family member who can lend/give you the money to cover the up front costs, that’s always an option. But not everyone has that. Fortunately, Craigslist is there to help you find a better option.

When I graduated, I sublet a room in a townhouse for three months while the occupant was away for the summer. Because I was only staying for three months, they told me they wouldn’t cash my security deposit check, they’d only cash it when I moved out if I left any damage (which of course I didn’t). So in essence, I rented a room for three months without putting down a security deposit. Also, because I was just subletting for three months while the occupant was out of town, the room was completely furnished. That allowed me three months to build up a little savings, so when it was time to find a new apartment, I had a little bit of money to get started.

Craigslist has so many listings that you’re sure to find an option that will work for your situation.

As for work clothes, your best bet is to get a few classic outfits from a discount store like T.J. Maxx or JC Penney. If you decide later on once you have your budget set that you’d like (and can afford) to purchase some nicer clothes, go for it. But for your first few months on the job, you don’t need to be decked out in designer apparel.

Don’t Borrow From Your Future

You can get as creative as you want to save money when you’re first starting out in the world, but the one thing you should absolutely not do is borrow thousands of dollars from your future with no guarantee that you’ll be able to pay it back. Don’t let the 0% APR lure you into a risky situation. You don’t know what the next 12 months will hold, so proceed with caution.

Totes. I got myself into a little bit of credit card debt after college. I felt like I needed the cards to survive. What I really needed was a budget and an emergency fund. Luckily, I was able to keep it mostly under control. I can’t imagine what it would be like to be buried underneath a mountain of credit card debt right out of school.

I got into a small amount of credit card debt here and there during my first few years because I had no concept of a budget and spent too much money on stupid things, but it could have been so much worse if I had needlessly piled on several thousand dollars of debt before even earning my first paycheck.

I have never been in credit card debt, but I did get suckered into 2 credit cards when I was in college. Citi was handing out 1. Free pizzas and 2. Free t shirts to any college student that signed up. I couldn’t decide between the pizza and the t shirt so I got both! Man, I was so smart! (Kidding)

I think this practice is banned now (thankfully). I could see how a lot of students would accept the card, use it once, use it again, then all of a sudden you’re loaded with debt.

Strangely enough, I had the hardest time getting my first credit card in college. I had a bank account with Wells Fargo, but for some reason they wouldn’t give me a credit card because my mailing address was a PO Box. So I started out thinking a credit card was a hard thing to get. If only I knew how wrong I was.

You make some really great points here. I really liked this quote “Oftentimes, people in their 40′s and 50′s have no idea how much money they spend on what, so we can hardly expect a 22 year old kid who has never lived on her own to have any idea whatsoever how much money she’ll need to meet her monthly expenses.” So true! I’d say early to late 20s is definitely the most difficult financial time in most people’s lives. You don’t really know how much you will make down the road, where your career will lead you, what sorts of mistakes you will make, whether the house you bought will actually be worth a lot less in a few years (housing crash…), or what macroeconomic events will end up impacting your life. All in all, it’s hard to disagree with you here.

The idea of a 0% APR card sounds super dangerous, I know a lot of people that carry a balance on 19%+ and they don’t seem to worried. I can’t image the spending that would occur with a 0% card. I love the subletting idea, and it’s something I will be taking advantage of next year at school when my lease runs out, it’s often cheaper and less restraining.

I can’t imagine anything more dangerous than telling someone who has no idea how to manage money that they can spend whatever they want and not accrue any interest for 12 months. How are they supposed to know their limits?

I think one of the main things to look for in a credit card is what your interest rate defaults to if you miss a payment. There are cards out there that give you a default rate of over 25% if you either miss one payment or your credit situation changes. You really need to read the terms of agreement before selecting a credit card very closely, they are required by law to tell you everything. If the company dramatically changes the terms on you after you get the card. You can always do a balance transfer to a card with friendlier terms.

After I graduated from college, many moons ago, I incurred thousands in credit card debt. From that point on, I learned to live within my means. Currently, I do use credit cards but only for the cash back and rewards benefits. I always pay it off on time and if it is a big purchase I make sure I have the cash in the bank first so I can pay it off immediately. Biggest lesson learned? Don’t spend more than you have, and you’ll be fine.